What is cryptocurrency and how does it work

Confused about cryptocurrency and how it works? Read on for a quick overview.

News of cryptocurrency is everywhere. It seems like talking heads are divided as to whether cryptocurrencies are the next blue chip or the next junk bond. Every week or so there is a sensational news story talking about big gains and incredible losses.

All of the hype aside, cryptocurrency is not as complicated as you might think, and given how important it is becoming to the national conversation about finances and investment, it is worth knowing about.

In this handy What is Cryptocurrency? guide I will do my best to explain cryptocurrency and how it works in the simplest terms possible. Hopefully this will give the reader a basic understanding of cryptocurrencies and some of the significant concepts related to it.

How people use cryptocurrencies

First, it is important to cover what it is that cryptocurrencies do. They are used by people who wish to exchange money for goods and services on the internet, which is to say that cryptocurrencies are used just like money and credit on the internet.

However, unlike traditional currencies, cryptocurrencies are not “centralized” meaning that their value is not really guaranteed by a bank or government. Rather each participant buys units of each coin and adds it to their “wallet” which is then used as a sort of address to keep track of the transfer of cryptocurrency units, along with the number of units transferred. This creates what is called a “blockchain”, a public ledger of activity within the cryptocurrency’s network. Different coins are part of different networks and are worth different amounts. Some coins are worth more than ten thousand dollars per unit, and others are worth only a few pennies (or fractions of) per unit.

How cryptocurrencies are valued

So, we can now have an idea of what cryptocurrencies are supposed to do and how they work. What gives them their value varies, in most cases it is market and investor faith, but some cryptocurrencies are valued against other standards.

For example, there is a gold standard cryptocurrency which was created by a Muslim person to comply with Sharia Law. If you were to buy a unit of that cryptocurrency (the Sharia compliant one), you should, in theory, be able to swap it for its equivalent value in gold.

One of the biggest fears currently surrounding cryptocurrencies is that more people are treating them as investments than currencies. This is a problem because if no one uses them as currency, then they have no practical value and will prove worthless as an investment as well. There is also a substantial fear that the government will step in to attempt some sort of regulation of cryptocurrencies, which would certainly change the market in a big way.

Without the lure of being largely unregulated and decentralized it is possible that a great deal of cryptocurrency patrons will flee the market.

Risk or investment?What I hope you learned from this brief explanation of cryptocurrencies it is that they are still relatively new concept and a possibly risky investment. It is best to consult with professionals before serious investing and that goes double for cryptocurrencies.

You should consult not only with a professional well versed in this emerging market, but also with more traditional investment professionals who can give you an idea of cryptocurrency’s place in the larger market.